What Obama Could Have Done to Hasten the Sluggish Recovery

More-aggressive action to neutralize the housing crisis could have put the nation on a faster growth track after the recession.(Paul Sakuma/AP)

The question Americans should be asking themselves heading into November isn’t, “Are we better off today than we were four years ago?” It’s, “Why aren’t we better off than Sweden?”

One way to judge the recovery from the Great Recession under President Obama is to compare America’s recent economic performance with other industrialized nations that experienced roughly equivalent recessions after the 2008 financial crisis.

It turns out that only two countries are in the same wealth class as the United States, suffered similarly in the Great Recession, and rebounded with substantially stronger growth in the ensuing recovery. Those countries are Sweden and Germany, and their experiences offer striking insights into how Obama could have improved U.S. growth—but didn’t—over the past three years.

Some perspective: The U.S. economy shrank by 3.5 percent in 2009, then grew by 3 percent in 2010 and 1.7 percent last year. Those numbers mirror the averages for the countries of the Organization for Economic Cooperation and Development—the loose collection of industrialized nations of all sizes—in the wake of the global recession.

Several OECD countries grew faster than the U.S. in that time. Some of them (such as Estonia) were bouncing back from far deeper recessions than America’s, which history suggests corresponds to stronger growth in the recovery. Others (such as Chile and Mexico) start from levels of industrialization, measured in gross domestic product per capita, far below the United States.

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That leaves Sweden, which contracted by 5 percent in 2009, then roared back with growth averaging 5 percent in the next two years, and Germany, which shrank by the same amount as Sweden but averaged 3.6 percent growth in the next two years. German unemployment is down to 5.5 percent, from a postrecession high of 8 percent. Sweden’s has fallen from a high of 10 percent to 7.5 percent.

Each country has its own special cocktail of economic success. Germany has benefited greatly from the European common currency, and economists praise its innovative, flexible labor laws. Sweden ran a fiscal surplus before the crash and wielded pro-growth monetary policy aggressively after it.

Thanks to automatic stabilizers in their welfare states, both the Germans and Swedes ramped up fiscal policy quickly after the recession to fill the void created by plunging exports. Federal, state, and local spending together grew much faster in Germany and Sweden than in the United States, where Obama pushed through a federal stimulus bill but state and local cuts have drained a net 500,000 jobs since the crash.

The biggest difference between those two rockin’ recoveries, and America’s halting one, is housing. Sweden and Germany “didn’t have a very significant housing bubble during the crisis,” said Jacob Funk Kirkegaard, an economist at the Peterson Institute for International Economics who studies Europe. “They did not have this massive private-sector deleveraging that had to take place.”

Housing prices dipped slightly in Sweden and Germany in 2009, then immediately started rising. Prices absolutely collapsed in the United States during and after the recession, plunging 5 percent a year, in inflation-adjusted terms, from 2009 to 2011.

Falling home values wiped out huge chunks of household wealth. A trove of economic research points to that lost wealth—including its effects on consumer spending and small-business formation—as the lead culprit of the slow recovery.

The inference here is that more-aggressive action to neutralize the housing crisis could have put the United States on a faster growth track after the recession. Obama couldn’t have prevented the crash, but he could have worked harder to vanquish it. If life gives you meatballs, at least make them Swedish.